CASH MANAGEMENT
Cash Management in Taiwan
July 23, 2007
Sam Ang, HSBC Global Payments and Cash Management - Originally published in HSBC Guide to Treasury and Cash Management in Asia Pacific 200

OVERVIEW:

• The biggest driver of 2006 growth continues to be the export sector, coupled with investment in the private sector.
• As Taiwan's enterprises expand operations into China and beyond, their cash management needs have also expanded, seeing a shift in focus from the domestic market to regional and global markets.
• The treasury management objectives of Taiwan's enterprises are increasingly shifting towards effective management of cross-border bank accounts, improvement of working capital management and improvement of liquidity management.
• There is a growing demand for banks to be able to provide corporate clients operating in a global environment with the facility to streamline their payments and cash management operations by integrating all activities through a single e-channel platform.

After a year of 'ups and downs' Taiwan's economic growth for 2005 registered a respectable 4.25%. The Taiwan Institute of Economic Research (TIER) estimates the economy will grow by 4.17% in 2006. The biggest driver of 2006 growth continues to be the export sector coupled with solid investment in the private sector. Exports are expected to remain stronger than imports, particularly for technology products, and a widening trade surplus is a key support for continuous gross domestic product (GDP) growth.

Other key factors to watch out for during the year include:

• Development of cross-strait relationships and domestic politics;
• Renewed oil price hikes and bird flu possibly dampening the global economy and Taiwan's export/import growth;
• Possible hikes in utility prices and other spill-over effects from rising import/production costs heightening inflationary pressure; and
• Possibility of out-flow of capital to offshore investments.

Taiwan Financial Market Regulatory Framework

The Financial Holding Company Law, Banking Law, the Securities and Futures Law, and the Insurance Law are the main pillars of the legal framework for the Taiwan financial market. Under this legal framework, several changes have been made to functions and responsibilities of the various regulatory agencies over the past two years with the major regulatory bodies and their respective responsibilities as follows:

Financial Supervisory Commission (FSC)

The FSC was established in July 2004 to supervise, examine and inspect the financial market. The Commission functions as an independent agency and reports directly into the executive branch of the government. The FSC comprises four bureaux; each is responsible for a segment of the financial market. The Bureau of Monetary Affairs (BOMA), the Securities and Futures Bureau, and the Insurance Bureau are responsible for the supervision of financial institutions engaged in their respective lines of business. The newly organised Examination Bureau integrates examination staff from the Central Bank of China (CBC), Bureau of Monetary Affairs, and the Central Deposit Insurance Corporation (CDIC) with the aim of providing better administrative and human resource services to financial examination staff.

The Central Bank of China

The CBC is responsible for monetary policy and foreign exchange regulations. The CBC adjusts the national money supply to promote its policy goals of price stability and sound economic growth. The CBC's other major objective includes the sound operation of banks in Taiwan and exchange rate stability.

Clearing Systems in Taiwan

Figure 1: Funds Clearing Systems
FISC	Financial Information Services Co., Ltd.	Domestic remittance system for Taiwan dollar (TW$) 391 participating financial institutions Single transaction limit of TW$20m
ACH	Automated Clearing House Interbank Fund Transfer	Operated by Taiwan Cheque Clearing House (TCH) Predominantly used for low value transfers
CIFS	System of Central Bank of China	Large value payments exclusively used for interbank settlements

Figure 2: Cheque Clearing Systems
TCH	Taiwan Cheque Clearing House	16 clearing zones throughout Taiwan

The above table shows the framework of Taiwan's payment and settlement systems.

Financial Information Services Company Limited

FISC is a multi-purpose inter-bank electronic funds transfer (EFT) system, developed and operated by the Financial Information Services Company so that banks may share common resources, exchange financial information and implement the overall automation of financial services. The system is Chinese character-based and provides Taiwan dollar (TW$) same-day, value inter-bank transfers.

Included in the FISC system are several other sub-systems such as the shared CD/automated teller machine (ATM) system, Interbank Remittance System, and the Financial EDI system (FEDI). The most widely used system is the Interbank Remittance System, with a total of 381 financial institutional participants.

Automated Clearing House

Known in Europe and other parts of Asia as the Interbank Giro Services, the automated clearing house (ACH) allows for direct electronic debiting and crediting of individual and/or corporations' bank accounts. ACH operates under the auspices of the Taiwan Clearing House (TCH). Bank customers send a list of account entry transactions to the originating bank for processing. The originating bank then transfers the transaction data to the TCH, which clears the debits and credits by the receiving bank, then transmits the balancing statement to the central bank for settlement.

CBC Interbank Fund Transfer System

The CBC interbank fund transfer (CIF) system is an online large-value TW$ interbank fund transfer system executed on a real-time gross settlement (RTGS) basis. Major participants are banks, investment and trust companies and bills finance companies.

Taiwan Cheque Clearing House System

The Taiwan cheque clearing house (TCH) system is a local currency paper-based cheque clearing system that is operated by the TCH with 16 clearing centres throughout Taiwan. An average of 618,100 cheques are processed daily with the cheques cleared through three major cities - Taipei, Taichung and Kaohsiung contributing over 75% of the total.

It normally takes two working days to clear a cheque drawn in the same city and five to seven working days to clear a cheque drawn in another city. Post-dated cheques (PDC) are commonly used for payment as well as a credit instrument since most local banks provide PDC discounting services.

Cheques and FISCs are commonly-used local payment instruments, contributing 29% and 71% respectively of total local payments made in 2005. In 1995, payments by cheque contributed 57% of total payments made while FISCs payments contributed less than 50%. The following graphs show the change in payment methods that took place over the past 10 years.

Figures 3 and 4: Changes in Payment Methods

Sources: The Taiwan Clearing House; The Central Bank of China

Regulatory Framework for Foreign Exchange in Taiwan

Under the CBC's current foreign exchange control regulations, settlement of foreign exchange against the TW$ and vice versa are categorised as follows:

1. Foreign exchange receipts from the export of goods or provision of services.
2. Foreign exchange disbursements for import of goods or for services provided by non-residents.
3. Foreign exchange receipts/disbursements from other sources, such as investments, capital repatriation and dividends.

Trade-Related Foreign Exchange Settlements (categories 1 and 2 above)

There is no limit to the amount of foreign exchange settlement against trade-related transactions, provided that supporting documents are provided to the foreign exchange bank at the point of settlement. Eligible supporting documents include letters of credit, documents against acceptance and documents against purchase (DA/DP), invoices and sales/purchase contracts.

Non-Trade Related Foreign Exchange Settlements (category 3 above)

Figure 5: Limits for Settlement of Non-yrade Related Foreign Exchange
Entity	Settlement of FX Receivables	Settlement of FX Payables
Taiwan Registered Business	US$50,000,000	US$50,000,000
Taiwan Individual Residents	US$5,000,000	US$5,000,000

Limits for Non-residents

Foreign nationals without Alien Resident Certificates (ARC) and overseas entities, which are not registered as business in Taiwan, are allowed to convert between TW$ and foreign currencies but are subject to a limit of US$100,000 or equivalent per transaction.

CBC Reporting and Declaration

All conversions of foreign currencies into TW$ or vice versa are subject to the following CBC reporting and declaration requirement. Foreign exchange (FX) conversions of TW$500,000 or more must be reported to the CBC by completion of a standard CBC declaration form. In the case of companies, the declaration form must be completed with the company's official seal(s). For corporates, supporting documents, such as invoices or the agreement or approval letter issued by the government, are required when the deal amount is in excess of US$1m. For individuals, supporting documents are required when the deal amount is TW$500,000 or more.

The following is the summary rule for corporates and institutions:

Figure 6: Summary Rule for Corporates/Institutions
Amount	FX Declaration Form	Supporting Documents
Less than TW$500,000	Not required	Not Required
Less than US$1m	Required	Not Required
Equal or larger than US$1m	Required	Required

Account Services in Taiwan

The following account types are available from banks in Taiwan:

TW$ Current Account

This type of account is only available to residents in Taiwan. Except for very limited cases, withdrawal from TW$ current accounts is by way of a cheque drawn on the account or via the bank's proprietary electronic banking system. By regulation, no interest is paid. Overdrafts on TW$ current accounts are allowed. Banks are free to establish different levels of overdraft interest rates for different types of customers but the interest rates charged cannot exceed the regulated maximum of 20% per annum. Under existing banking laws, current accounts denominated in foreign currencies are not allowed.

TW$ and Foreign Currency Demand Deposit Accounts

TW$ and foreign currency demand deposit accounts (DDAs) are available to both residents and non-residents. Interest is paid on balances in these accounts. Banks are free to establish interest rates to be paid based on market conditions. Based on local banking practice, interest is credited to these accounts twice a year at the beginning of January and July. Ten per cent tax is withheld from interest paid to residents' accounts while 20% is withheld from non-residents' accounts.

TW$ and Foreign Currency Fixed-Term Deposits

Tenors could range from one month to up to three years for TW$. For foreign currencies, tenors range from overnight to up to one year. Simple interest is paid at maturity. Ten per cent tax is withheld from interest paid to residents while 20% is withheld from non-residents.

Offshore Banking Unit Accounts

Non-resident corporations are allowed to hold offshore banking unit (OBU) accounts with banks that operate OBUs in Taiwan. Most local banks and some branches of foreign banks have established OBUs in Taiwan. TW$ accounts are not available at OBUs. The benefit of OBU accounts is that interest earned on these accounts is non-taxable.

Regulations Governing Liquidity Management

Taiwan banking regulations do not allow the sweeping of funds among accounts. Withdrawals from current accounts can only be made by writing cheques and withdrawals from savings and/or demand deposit accounts must be based on customers' express written instructions on a case-by-case basis. Withdrawals from any TW$ accounts, except for the payment of utilities or credit cards, cannot be based on account holders' standing instructions.

TW$ pooling services with savings accounts and current accounts with overdraft facilities under the same entity or group entities are allowed. Cross-currency and cross-border pooling is not feasible, due to regulatory constraints on foreign exchange conversion, plus tax and accounting considerations.

Conclusion

With the increasing globalisation of Taiwan's enterprises, their cash management needs have also expanded from domestic centric to regional and global centric. Effective management of cross-border bank accounts, improving working capital management with the aim of enhancing efficiency of payments, reducing the collections cycle and improving liquidity management has increasingly become a major cash and treasury management objective of Taiwan's enterprises. Against this backdrop, a bank's ability to provide its corporate clients with the facility to streamline their payments and cash management operations by seamlessly integrating all the peripheral and related activities through a single e-channel platform is becoming increasingly critical to the bank's success.

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